Mattel, With a Marketing Emphasis.

¶ … Mattel, with a marketing emphasis. The history of the company and its core brands is discussed, along with the company's current condition. A SWOT analysis reveals that despite the company's stability there are challenges and opportunities that make it important to make the right strategic choices today. The paper considers both domestic and international marketing strategy. Mattel must, however, avoid controversy, and for the most part the company does this well. The paper also takes into account trends in the business and an external analysis using the PEST framework before making conclusions.

Mattel was founded in 1945 by Ruth Handler, Elliot Handler and Harold Matson. The first products that the company made were picture frames, but soon Elliot began making dollhouse furniture. The company would eventually begin building a toy business. In 1959, Barbie was introduced, and this was to become Mattel's signature product. The company went public on the Pacific Coast Stock Exchange the next year and by 1965 was a Fortune 500 company with revenues over $100 million. Hot Wheels cars were introduced in 1968, and would become another major product for Mattel. By 1977, the company had entered the electronic gaming segment. This proved a poor decision by the company and by 1984 it was losing money and Mattel was forced to abandon the segment, which was built around the Intellivision brand. In 1982, the company introduced the He-Man brand and by the end of the decade was entering into deals with foreign firms for their properties and to bring key Mattel brands overseas. In 1993, the company acquired Fischer-Price, the major infant's toy manufacturer, and this brand brought the company Tickle-Me Elmo in 1996, another smash hit product for the company. The time since then has been characterized by a series of acquisitions and divestitures to bring the company to its current form. The company also licensed a number of different properties, including Harry Potter, that would help earn revenue over the coming decade. At this point, new product introductions were largely in brand extensions, like "Chicken Dance Elmo" and the like (Mattel.com, 2012).

Background

Today, Mattel is a relatively stable company. The company's revenues have fluctuated in recent years as a result of the financial crisis, but have remained within the $5.9-$6.2 billion range for four out of the last five years (MSN Moneycentral, 2012). In that time, the company has demonstrated relatively stable profits as well, with only one year out of the last five being at an unusually low level. In the 2011 fiscal year, Mattel earned net income of $768.51 million in revenue of $6.266 billion. The company's balance sheet is healthy, with just $1.5 billion in long-term debt and debt-equity ratio of 1.17. The company's finances appear to be quite steady.

Using Porter's generic strategy typology, Mattel has a differentiated strategy, where the branding and uniqueness of the company's toys allows it to charge premiums for its goods while still courting the mass market (QuickMBA, 2010). The company's major brands are Barbie, Hot Wheels, Matchbox, Fischer-Price, and American Girl. The company has major licensing properties such as Toy Story, WWE Wrestling, Batman, Dora the Explorer, and Disney Classics (Mattel 2010 Form 10-K). The company's organizational structure is broken down by three product divisions -- Mattel, Fischer-Price and American Girl. There are geographic divisions and each product also has a unit. According to the Form 10-K, the company's North American sales are 54% of total sales. International sales are the other 46%, with 52% of this coming from Europe. Latin America is a further 30% of international sales, with Asia Pacific and "other" making up only a small portion of the company's total sales.

The company owns some of its own production facilities, and also utilizes some third-party manufacturers. Some of its products are designed elsewhere, especially the licensed products. The company acts as a marketer and a production coordinator for the full slate of its brands. Production is focused on China, Indonesia, Thailand, Malaysia and Mexico. The competitive environment is intense, and Mattel competes against firms like Bandai, Hasbro, Lego, Play Mobil and MGA Entertainment various segments of the children's toy market. As Mattel sells primarily to children, it business is affected not only by the number of children in the world (or it its major markets, specifically) but on the relative wealth of the parents in this regions, since the products are marketed with a differentiation strategy (2010 Mattel Form 10-K).

SWOT Analysis

Mattel's size and stability comes from its many strengths, and contributes to those strengths is a positive feedback loop. Clearly, the company's core strength is its powerhouse brands. Barbie might be the world's most recognizable toy brand, and is iconic in many Western markets. The brand has been successfully extended a number of times, such that an entire family of products exists with the Barbie brand. As an example of how powerful the brand is, the company was able to piggyback on the success of the Hunger Games movie with a Barbie co-branded product, and it did the same thing with the Twilight series of movies, indicating that Barbie is a major brand in merchandising such that it adds value even to the most successful of franchises (Ng, 2012). Hot Wheels and Fischer-Price are also segment-leading brands that have considerable reach. That these brands have been around for decades (50, 40 and 75 years respectively) means that parents today grew up with these products. That makes these products among the first choices for their children, something that other toymakers have difficulty matching.

The company's financial health is another key strength. Financial health is important for two reasons. The first reason is that the company is able to withstand economic downturns without compromising its business or its expansion plans. Mattel weathered the recent financial crisis fairly easily because it had a war chest of money set aside. Financial strength also allows the company to take advantage of opportunities that present in the marketplace. This could be entering new markets, launching new products or engaging in merger & acquisition activity. With healthy finances, Mattel can do any of these things without restraint in order to build its business.

The company's distribution networks and other goodwill are also important to its success. Mattel's stability and narrow focus on toys work to its advantage here. The company has very strong relationships with both its supply chain and with its distribution and retail channels. These relationships facilitate the introduction of new products -- when Mattel calls a major retailer with a new product, the retailer will probably buy it just based on the company's reputation, especially if that product is associated with one of Mattel's core brands. This is a major advantage over many of the smaller competitors in the toy business.

These strengths aside, Mattel does have some weaknesses. Looking at the big picture, one weakness that the company has is that it lacks diversification. It sells to both genders and markets around the world, but Mattel only sells toys. While there are advantages to this from an operations perspective, the company is highly dependent on the overall health of the toy market. If this market were to struggle, Mattel would not have anything else to fall back on.

Mattel has in the past had some reputation issues, often to do with Barbie and body image. Concern among parent groups is one thing, and challenging enough, but academic studies have found that Barbie can have a negative effect of the body image of young girls (Dittmar, Halliwell & Ive, 2006), and this is something that has to concern Mattel because it creates negativity surrounding the company and its flagship product. The company becomes open to criticism and the publicity surrounding this issue damages the company's goodwill in the marketplace.

Another weakness that Mattel has lies within its innovation pipeline. The company grew to be a powerhouse toymaker on the strength of internal product development. Yet the last major brand was acquired through acquisition (Fischer-Price) and the company largely relies on brand extensions and licensed products nowadays. It has been a long time since Mattel introduced a major new product that was developed in-house.

New product innovation therefore is also an opportunity for the company. The toy market is ever-evolving. One of the good things about being in this business is that the customers turn over constantly, as older ones grow out of the toys and new children are born. The company can constantly refresh its product line. There is no real brand loyalty other than that of the parents, so a successful new product line can become very popular very quickly, spurring a massive sales growth.

In addition, there appears to still be plenty of growth in overseas markets. Most of Mattel's business is in North America and Europe, leaving Asia Pacific and Latin America as massive growth markets. If the company can make inroads into these markets, especially as the middle class in these regions grows, then Mattel can grow its sales significantly. It is worth noting that like many companies, Mattel has grown since its inception largely on the basis of population growth. Not to take anything away from Mattel's products, but the population of the world and its wealth have increased substantially since 1945. The company now stands to benefit from a surge in growth as the baby boom echo generation enters child-bearing age. This massive demographic will likely have a lot of children as well, giving Mattel a chance for strong demographic growth in the North American market. The company grew strongly during the baby boom years, and now their grandchildren are the next major wave of potential consumers.

There are a number of threats that the company faces, however. Competition is a major threat, as it comes not only from other toymakers but from video games, computers and other electronic entertainment. Children raised on computers are now having kids, and they will be less likely to buy their children dolls and toy cars as a result, unless Mattel can convince them of the merits of doing so. This might create video game and mobile app opportunities, but they are not likely to replace the revenue associated with physical toys. Beyond this, the company relies heavily on its branding to distinguish its toys from the toys of cost leaders, companies that usually have no serious branding but sell at a fraction of Mattel's prices.

The economy is another threat. Mattel suffered a steep decline in sales during the recent recession, with a decline of 8.2% during the 2009 fiscal year. While it has recovered now, such declines are likely to occur in the event of future economic downturns. It is worth noting that the high degree of seasonality in Mattel's business (Form 10-K) means that the company could suffer strongly from a short-term downturn that happened to span the Christmas season.

Other key threats are with labor conditions, given that the company contracts out a lot of production to the developing world -- China, Southeast Asia and Mexico -- where labor laws are poor. The company would come under significant fire in particular if its toys were made with child labor, as occurred at one Indonesian supplier in the late 1990s (White, 1998). Lastly, the international business exposes the company to considerable foreign exchange rate risk that could affect the costs of the goods or the translation of foreign transactions to Mattel's balance sheet. With almost all production and half of the company's sales coming from outside of the U.S., this is a significant risk that the company must actively manage.

Domestic Implications

Mattel's best market is the United States, and this is where the company concentrates much of its activity. As noted, demographics are turning favorable in the domestic market, and this implies a significant opportunity for Mattel. The company must contend, however, with the forces of technological change and the threat posed by the sluggish recovery from the economic downturn.

From a marketing perspective, the company has strong products, but has not been able to make any major new product introductions in recent years. There is continual opportunity, however, due to consumer turnover and the emergence of new technologies and entertainment properties. However, the driver of domestic business at Mattel remains its core properties. Liu (2009) reports that intense competition and the threat of substitutes like video games have contributed to sluggishness in the Barbie brand. Yet, the brand does have sporadic success that the company can build on. For example, the Barbie brand recovered with a 17% increase in sales globally last year, and the company had strength across all of its brands, pointing to the enduring strength of the company's brands (Egan, 2011).

The most likely approach for Barbie is that the brand will continue to grow domestically. However, the company needs to do a couple of things to ensure that all of its brands continue to grow. Aggressive marketing is essential to keeping the product in the minds of consumers. While today's parents grew up with Barbie, Hot Wheels and Fischer-Price, they need to be reminded of this before they begin to buy their children electronic toys or those of competitors.

Another domestic implication is that Mattel needs to focus on innovation within its core products, in order to ensure that they are continuing to be relevant to new children. The brands have seen periods of flat sales when innovation has slowed, so it is imperative that brand extensions be frequent and always in tune with the tastes of the current generation of children.

In addition, Mattel has had significant success with its licensing arrangements, particular its deals with Disney, the WWE and the owners of Batman. The company should pursue more of these deals, as they often come with a ready-made market. That market, however, can be improved through association with Mattel. Domestically, marketing tie-ins like the Hunger Games doll have good potential for short-term revenue gains.

International Implications

There have been many periods recently where Mattel's gains in international markets have offset sluggishness in the domestic market. Last year, the company saw international sales increase 13%, compared with 6% growth in the United States. The biggest gains were in the emerging regions of Asia Pacific and Latin America. In particular, Mexico and Brazil have been cited as strong markets for the company (Kell, 2011).

Although these markets are a relatively small part of Mattel's business today, they represent the best growth opportunity for the company. North America and Europe -- the two largest markets -- are relatively mature with slow economic growth and slow-growing populations. Asia and Latin America, by contrast, have strong population growth and economic growth. For Mattel, marketing strategy in the coming years should revolve around building out share in these markets. As consumers in these markets enter the middle class, they will be able to spend more on toys. Mattel, with its strong distribution networks, is well-positioned to take advantage of this.

It is also recommended that Mattel develops new products in its foreign markets, instead of simply exporting ideas from the U.S. market overseas. A company that utilizes this model to tremendous success is Coca-Cola, which always has local brands to complement its global ones. The local brands appeal directly to local tastes, and that is something that Mattel can do with its toys as well, by finding properties from within the entertainment industries of foreign countries or by creating their own products. Sometimes, innovations in foreign countries can be repatriated to the U.S., improving Mattel's new product pipeline in the domestic market.

Controversial Issues

Mattel has faced controversy over its marketing and manufacturing practices at various times throughout its history. Typically, the company has responded well to these challenges and as a result its goodwill has not suffered unduly from these challenges. The body image challenge is a common complaint that activists have with Mattel, based on charges that Barbie fosters a negative body image in young girls. Such issues are bound to arise with firms that market to children, because marketing to children inherently raises sensitive issues with regards to the impressionable minds of children and the ethics of marketing to such minds. A quick Google search reveals that many in the public have issues with Barbie's effect on girls' body image, but it may be the case that the company and its products are unfairly targeted. Mattel has taken steps to combat the charges, but remains a target for groups that are determined to be outraged.

The problem for Mattel is twofold. On one hand, Barbie is a billion-dollar toy, so the company is reluctant to make changes that might affect the sales of the doll, especially when its detractors are not necessarily going to purchase Barbie anyway. The other problem for Mattel is that it cannot appear too combative in attempting to manage this situation. The critics are working with cliches as much as they academic research. Mattel is a highly visible target, but there is little reason to believe that the company can avoid such criticism because a lot of the criticism is based on speculation and anecdotal evidence.

Another point of controversy at Mattel is with respect to the labor conditions at its suppliers. Because Mattel's suppliers are almost all located in the developing world, the labor conditions are inevitably going to be poor. This puts the company in the crosshairs of activists inherently. However, because the company sells toys to children, it is at particular risk with respect to child labor issues. The irony is simply too good for the media to resist, and the situation becomes a public relations nightmare. The company realized this early and took steps to ensure that such problems would not happen. This means exerting more pressure on and control over suppliers than most companies would have to (Barboza & Story, 2007).

In addition, Mattel utilizes this tight control over suppliers to ensure that its products are safe for children. Recalls of toys that are flammable or have parts small children could swallow are expensive, and generate substantial negative publicity for the company. China is a source of a lot of these types of problems, so Mattel pays special attention to its Chinese suppliers to ensure that products are absolutely safe for children. Mattel now owns a lot of its production capacity in China to ensure that it can maintain health and safety standards, and ensure that there is nothing even close to child labor at its facilities (Barboza & Story, 2007). In this way, Mattel has taken a strong response to the threat of scandal and controversy, minimizing the potential financial damage. The company is as good as it is with overseas production in part because it has been producing in Asia since the 1950s, the first Barbie having been made in Japan.

Business Trends

For the most part, the toy business is threatened by the trends, at least in developed markets. Children are switching to video games at younger ages, and there is intense competition for the business that does remain. Mattel, for example, has a costly lawsuit ongoing with MGA Entertainment over its Bratz dolls (Skariachan, 2011). This intense competition is offset somewhat by what appears to be a cyclical upturn in the toy business, and that upturn could be the result of the demographic factors mentioned previously with the baby boom echo children entering their family-raising years.

Video games are becoming increasingly popular, even with young children. This represents an ongoing existential threat to Mattel and other toymakers, because as younger children make use of video games, this will cut into the sales of toys. In the short run, this trend is a risk, but in the long run children who are raised today on video games are likely to skip the toy-buying phase altogether when they become parents. In the long-run, therefore, Mattel needs to develop a strategy to combat video games, which in previous generations mainly appeal to teenagers and young adults.

There are some other trends in the toy business that are worth mentioning. A big one is consistently increasing costs. Mattel's revenue increases last year were offset somewhat by rising costs for fuel, Chinese labor and resins (Skariachan, 2011). As a result of these costs, profits did not rise nearly as quickly as revenues did. These costs are a long-running threat to the profitability of Mattel because the company has very little control over the costs. The company owns many of its Chinese factories, making it more difficult to move production to lower-cost countries. The company could move its plants to cheaper parts of China (right now it has a lot of capacity in relatively expensive Shenzhen). Fuel and resins are both related to the price of oil, which is on a long-term upward trend. It is unlikely that this trend will be reversed any time soon, given the supply and demand conditions for petroleum. Oil prices have been quite volatile in the past few years, and this volatility is expected to continue, or even worsen, over the course of the next few years (Ready, 2011).

PEST Analysis

The political environment is generally favorable for Mattel. The public complaints about child product safety and body image have not manifested into legislation, and there is little appetite among politician to raise these issues. At this time, there are few trade barriers between Mattel's suppliers and its markets. This situation is expected to continue. Mattel's major markets are generally stable, which minimizes political risk and allows the company the opportunity to hedge its foreign exchange rate risk, should it choose to do so.